Nigerian Crude Oil Could Drop To N3,000 In 2016?

Could the price of Nigerian crude oil drop to as low as $15 (N3,000) next year?

Oil speculators are buying options contracts that will only pay out if crude oil drops to as low as N3,000 a barrel next year, the latest sign some investors expect an even deeper slump in energy prices.

The wagers come amid OPEC’s effective scrapping of output limits, Iran’s anticipated return to the market and the resilience of production in countries such as Russia which all increase the chance of a prolonged global oil glut.

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Any slump in the price of crude oil will have a major effect on the Nigerian economy which is completely dominated by the oil industry.

“We view the oversupply as continuing well into next year,” said Jeffrey Currie, head of commodities research at Goldman Sachs.

The bearish outlook has prompted investors to buy put options — which give them the right to sell at a predetermined price and time — at strike prices between $15 – $30 (N3,000 – N6,000), according to the New York Mercantile Exchange and the U.S. Depository Trust & Clearing Corp.

West Texas Intermediate, the U.S. crude oil benchmark, is currently trading at about $36 (N7,172) a barrel.

In comparison Bonny Light oil, the Nigerian benchmark, was trading at just under $31 (N6,176) yesterday, down from $62 (N12,353) a barrel six months ago.

Investors have bought increasing volumes of put options that will pay out if the price of WTI drops to $20 to $30 a barrel next year. The largest open interest across options contracts for December 2016 is for $30 (N6,000) a barrel.

The number of outstanding contracts below N6,000 a barrel is relatively small.

However, the open interest for June 2016 put options at N4,981 a barrel has nearly doubled over the last week.

Investors have even bought put options that will pay out if WTI drops below N3,000 a barrel by December next year. The volume of financial bets at that level is 640,000 barrels in total.

Investors buy put options not only to bet that prices will drop, but they also take them as insurance.

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Any drop in crude oil prices would have a major effect on the Nigerian economy.

Crude oil accounts for 78% of the Nigerian economy.  The entire oil and petroleum production industry occupies a massive 94% of the country’s economy.

The news of the potential drop in prices in 2016 comes amid the ongoing fuel scarcity crisis which has dragged on for months.

Despite optimistic forecasts by politicians the crisis appears likely to continue with prices reaching a record high of N300 in Jagawa state alone.

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